Basic ideas of present value analysis 1 Explain what the ‘time value of money’ or ‘present value’ concept is all about. Why would business people be sensitive to it?

2 Calculate the present value of each of the following:

a $1000 to be received a year from now. If it were on hand now, it would be invested at 10 per cent interest.

b $1000 to be received at the end of each of the next three years. The opportunity cost of interest, or the cost of capital in this case, is 12 per cent.

3 Answer part 2b again but assume a rate of 10 per cent. Why is the present value higher when the rate is lower?